Heads, you win; tails, you lose. Flipping houses is a gamble. As an entrepreneur, you may speculate on recycling foreclosure and tax lien properties, which in some states, cannot have an opening auction price greater than the amount owed. However, waning consumer confidence and plummeting home sales have made flipping houses a high-risk game. While it is possible that you may reap a decent profit, there is also a good chance the total of your accrued taxes, renovation costs, insurance and initial purchase price could exceed the market price.

Due Diligence

Your success at house flipping hinges on prudent acquisitions. You must physically assess the property to the best of your ability. Choose a distressed home that requires mostly cosmetic changes, like new carpets and fresh paint, as opposed to costly structural repairs, like a new roof or foundation. Have a title search done for the property by a reputable title company in the same county as the property to discover any liens or additional mortgages. Hire a private contractor to inspect the property, even if you cannot go inside because of tenancy.

Speculation

Avoid properties that are in remote areas because they have little resale value. In 2011 CNN Money article, finance journalist Shawn Tully warns that some foreclosure markets are overbuilt and too far from major employers that would attract newcomers to the area. MIT economist William Wheaton predicts in the same article that there could still be 1 million foreclosures a year through 2013.

Budgeting

Don't bite off more than you or your investors can chew financially; acquiring a distressed property entails ongoing maintenance, taxes, property insurance and potentially costly, unexpected repairs. Be sure that you and your investors are willing to maintain the property in the event that it does not sell immediately. Have a backup plan for handling the ongoing costs, if necessary.

Payback Schedule

You can opt to restore a neglected property and sell it on a land contract or lease rather than trying to sell it outright right away. In this situation, private investors are paid monthly from the lease income. Investors often favor using short-term renovation or rehabilitation loans because then they don't have to pay for repairs out of pocket. To reduce the foreclosure inventory and stabilize prices, the Federal Housing Authority has endorsed house flipping and, as of the time of publication, is encouraging private investors by waiving the prohibition against insuring mortgages to purchase properties that can be sold in less than three months. The property and the real estate investor must meet specific criteria to qualify.

Cover Your Assets

Protect your assets by consulting with an attorney about creating a business contract with private investors. The contract might state that investors will be paid a percentage of the sale price, after expenses such as taxes, repairs, insurance and other related costs; and that due to market volatility, the amount realized may or may not exceed their initial investment. The contract might also include a disclaimer stating that investors will be reimbursed from the profit, less expenses, based on a percentage of their initial investment. Another disclaimer might explain that private investors will be paid only from the proceeds after all expenses incurred in the transaction have been satisfied.

About the Author

Tracy Stefan began writing professionally in 2007, with work appearing on various websites. She earned a Bachelor of Arts in creative writing and performing arts from the Evergreen State College. Stefan is also a graduate of Dell'Arte.